Editorial, Utility

7 SIP Myths To Keep At Bay For Wealth Creation

Systematic Investment Plans or SIPs are a favourite amongst investors as they not only inculcate a saving habit but also provide the benefits of compounding and rupee cost averaging to create wealth in the long term. However, many times investors get affected by various myths surrounding SIPs and remain sceptical to invest. In case you are planning to invest in SIPs, it would be wise to do a thorough research of this investment mode to keep any kind of myths at bay.

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Myth: SIP Is An investment

Many small-time investors believe SIP is an investment. What they are not clear about is that SIP is a mode of investment in a Mutual Fund and it is not an investment in itself. When you invest through an SIP, it implies you are investing periodically in a mutual fund of your choice. It can be monthly, quarterly or annually mode of payment.

Periodic investment in mutual funds through SIPs helps tide over market volatility, leading to rupee cost averaging. In other words, SIP will invest in more units when the price is low and fewer units when the price is high and thus the market volatility is evened out.

Myth: You Will Be Penalised For Missing Out On SIP Payment

People mistake SIP for EMI on loans. But SIP is a different game altogether. While EMI is a liability for you and you need to fulfil it, SIP is voluntary. You won’t be charged any penalty for missing SIP instalment or if you want to stop it mid-way. If you wish to stop an SIP, you need to just write to the respective fund house or do it yourself through the fund house’s portal. Also, if your SIP instalment fails due to insufficient fund, it won’t affect your credit score either.

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Myth: Lump Sum Is Not Possible In ongoing SIP scheme

As mentioned earlier, SIP is just a mode of investment and hence, you can go ahead and invest the lump sum amount in that particular mutual fund. Your monthly SIP of Rs 1,000 will continue unless you wish to stop it midway. So, in case if you have a SIP scheme of Rs 1,000 per month, you can still invest a lump sum amount in the same mutual fund if you earn any surplus money. Caveat: some mid-cap and small-cap schemes have barred lump sum investments.

Myth: Markets Are Too high, Do Not Invest Or Continue SIP

The logic behind SIP is to even out market fluctuations. Irrespective of the market conditions, you can start or continue investing in SIP and eliminate the futility of timing the market. When the market is weak, you buy more units of the mutual fund in the same SIP amount, thus leading to lower average purchase cost. And when the market corrects, your gains are higher due to increased units accumulated at a lower average purchase cost. Hence, SIP takes advantage of market volatility and should be continued irrespective of the market situations. Anytime is a good time for SIP.

Myth: You Can Withdraw Entire Money In Tax-saver SIP Fund After Three Years

Investors believe they can withdraw entire money after three years in tax-saver SIP fund but that’s not the case. The lock-in period is applicable three years from the date of every SIP instalment and not the date when you start the SIP originally.

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Myth: You Cannot Alter The SIP Amount

You can any time increase or decrease your original SIP amount without paying any additional charge for it. Once again, SIP is voluntary and you can vary the SIP amount depending on your preference. But remember the minimum limit is Rs 500 per month.

Myth: You Need To Continue Investing In SIP For Long Term

Well, it’s not true. You can invest in SIP on a mutual fund for six months to a year or any period of your choice, but the investment duration or the ‘holding period’ should be for a long term to enjoy the benefits of compounding, rupee cost averaging, as well as lower rate of tax on your returns. A longer duration of investment through SIP helps even out market volatility to give high returns and create wealth.

It is thus important to read the terms and conditions of investing in mutual fund through SIP other than clearing all misconceptions regarding this mode of investment.

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Source: MSN

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